NCPERS Studies the Impact of Public Pension Expenditures on Education Spending

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NCPERS Studies the Impact of Public Pension Expenditures on Education Spending

On April 17, 2023, the National Conference on Public Employee Retirement Systems (NCPERS) released its report, Do Public Pension Expenditures Impact Education Spending? According to NCPERS, over a 26-year period from 1993 to 2019, the growth in education funding has been stable and increased to about three times the annual rate of pension spending. During this period, the growth of pension funding averaged 0.82% annually while education funding increased at 2.48% annually. The report states that “those who argue that pension expenditures are outpacing education funding fail to look at the impact of volatility in pension funding.”

Other key findings presented include:

  • Pension funding is not likely to shift education funding since pension contributions are a relatively small part of state and local revenues.
  • During the last 25 years, the average pension expenditures were 3.6% of state and local own-source revenues (i.e., taxes and fees collected by municipalities) as compared with education expenditures being 33.8%. As a result, even if pension expenditures increase faster than education expenditures, pension funding is unlikely to crowd out education funding since the ratio of both should remain about the same.
  • State and local governments face many competing priorities and should establish approaches so their revenue systems are consistent with the economy.

The study concludes that, “public pensions do not crowd out education funding—or funding for other public services including health care and public safety.” 

The report is available here.

CRR Releases Brief on the Sustainability of State & Local Pensions

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CRR Releases Brief on the Sustainability of State & Local Pensions

On April 11, 2023, the Center for Retirement Research at Boston College (CRR) released its issue brief, The Sustainability of State & Local Pensions: A Public Finance Approach. The brief examined the fiscal outlook for state and local government pension plans under current benefit and funding policies. The CRR analysis presents an alternative to full prefunding of state and local pensions. The alternative approach discusses stabilizing pension debt as a share of the economy, or Gross Domestic Product (GDP).

The brief states, “To assess the feasibility of this approach requires: 1) projecting the annual cash flows for a nationally-representative sample of 40 state and local pension systems to see the future evolution of each plan under current contribution levels; and 2) estimating the contribution increases needed to stabilize the ratio of pension debt to the economy.”

According to the brief’s findings:

  • “Under current contribution rates, baseline projections show no sign of a major crisis in the next two decades even if asset returns are low.
  • Yet, many plans will be at risk over the long term of exhausting their assets, so action will be needed.
  • Plans can reach a sustainable footing by stabilizing their debt-to-GDP ratio, with much smaller contribution hikes than under full funding.”

The brief is available here.

NIRS Issues Brief on Social Security’s Special Minimum Benefit

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NIRS Issues Brief on Social Security’s Special Minimum Benefit

Recently, the National Institute on Retirement Security (NIRS) released its issue brief, A Vanishing Benefit: Why Social Security’s Special Minimum Benefit is Fading Away. The brief reports on Social Security’s “Special Minimum Benefit” (SMB) that was initially enacted by Congress in 1972. The SMB is an alternative Social Security formula to establish a benefit “floor” intended to protect workers from experiencing severe poverty in retirement.

To be eligible for the SMB, workers must: 1) have a record of 11 years or more of covered employment; and 2) not be qualified for another Social Security benefit of a higher value. Over time, indexing of the SMB formula combined with substantial economic changes has made the policy unsuccessful at reducing poverty. Since the indexing was based on prices rather than wages, participation in the program has diminished. As a result, no new retirees will qualify for the benefit in the near future.

According to the brief, “Fixing the minimum benefit would help to reduce financial insecurity among seniors by providing adequate benefits for workers with lifetime low income who may not otherwise be able to continue employment past the standard retirement age.” 

The brief concludes, “Congress will be forced to address Social Security’s financing in the coming years as the Social Security trust fund is projected to be depleted in the 2030s. Various proposals already exist to expand and/or modify Social Security benefits. Whenever Congress does act to pass major Social Security legislation, it should fix the indexing of the special minimum benefit. Establishing a true floor to prevent elder poverty would do much to improve retirement security for low-income Americans.” 

The report is available here.

Medicare Trustees Release the 2023 Report on the Financial Status of Medicare Funds

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Medicare Trustees Release the 2023 Report on the Financial Status of Medicare Funds

On March 31, 2023, the Medicare Board of Trustees released its annual report on the financial status of the Medicare funds. Total annual Medicare expenditures were over $905 billion in 2022 or 3.7% of Gross Domestic Product (GDP), and are expected to grow to 6.1% of GDP by 2097. The report warns that Medicare expenditures are projected to increase in most of the future years at a faster rate than either aggregate workers’ earnings or the overall economy. Total income for the Medicare program in 2022 amounted to about $989 billion.  

The Medicare program consists of two component programs for the elderly and disabled: Hospital Insurance (HI) and Supplementary Medical Insurance (SMI). The HI program (Medicare Part A) pays primarily for inpatient hospital care and is financed by a payroll tax of 1.45% of taxable earnings. The SMI program consists of Medicare Parts B and D. Medicare Part B is a voluntary program that pays for physician, outpatient hospital, home health, and other services. Medicare Part D is a voluntary program providing access to outpatient prescription drug benefits. Approximately one-quarter of the SMI program is financed by beneficiary premiums, with the remainder financed by transfers from the U.S. Treasury’s general fund. 

According to the Medicare Trustees’ report, the long-term financial status of the HI Trust Fund changed with the actuarial deficit increasing to 0.62% of taxable payroll from 0.70% in last year’s report. The HI Trust Fund is projected to be insolvent in 2031. After the HI Trust Fund is exhausted, payroll tax revenues would cover 89% of the projected HI program expenses in 2031. 

The financial outlook for the SMI program is better than the HI program. Under current law, each account within SMI is automatically in financial balance. For both Medicare Parts B and D, revenues are projected to equal expenditures for all future years, but only because beneficiary premiums and general revenue transfers must, by statute, be increased to meet expected costs for each year. However, the rapid growth of health care costs is expected to greatly accelerate the need to finance these benefits.  

The report states, “The financial projections in this report indicate a need for substantial changes to address Medicare’s financial challenges.” It adds, “The Trustees recommend that Congress and the executive branch work closely together to expeditiously address these challenges.”

The report is available here.

 

Social Security Trustees Release the 2023 Report on the Status of Social Security Funds

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Social Security Trustees Release the 2023 Report on the Status of Social Security Funds

On March 31, 2023, the Social Security Board of Trustees released its annual report on the program’s financial and actuarial status. In 2022, Social Security paid benefit payments to about 66 million beneficiaries and the total cost of the program was $1,244 billion. According to the report, the combined assets of the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) Trust Funds are projected to be depleted in 2034 (one year earlier than projected last year). Should this occur, Social Security would be able to pay only 80% of scheduled annual benefits after 2034 through the end of the projection period in 2097.  

Furthermore, the OASI Trust Fund is projected to be depleted in 2033 (one year earlier than last year’s estimate) with 77% of benefits payable at that time. However, the trustees dramatically revised their estimates for the lifespan of the DI Trust Fund. The DI Trust Fund is not projected to be depleted during the 75-year period ending in 2097. According to the report, the significant change in the reserve depletion is mainly due to the continuing favorable trends in the disability program. Since 2010, disability applications have been declining and the amount of disabled-worker beneficiaries receiving payments has been decreasing since 2014.  

Over the 75-year long-range period from 2023 to 2097, the actuarial deficit of the combined OASI and DI Trust Funds is 3.61% of taxable payroll, up from 3.42% in 2022. Expressed in relation to the Gross Domestic Product (GDP), the annual cost of Social Security benefits is projected to increase from 5.2% of GDP in 2023 to a peak of about 6.3% in 2076, and declines to 6.0% by 2097. 

The trustees recommended that lawmakers address the trust fund deficits soon in order to gradually phase-in the necessary changes to allow workers and beneficiaries time to adjust to them as well as to protect future generations. 

The report is available here.